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Radical reformation: What SA can learn from the east

Ramaphoria has been pleasant after the past decade of doom and gloom, but SA’s economy will need a structural overhaul if low growth, poverty and unemployment are to be addressed

28 June 2018 - 05:00
Sunita Menon

In what seems a world away from the slowly deindustrialising SA, emerging markets are giving the US and EU a run for their money. Since the global financial crisis, SA headlines have been full of doom and gloom — depressingly low growth, high unemployment of more than 25% and a credit ratings downgrades.

December 2017 was thought to be a turning point, and as Cyril Ramaphosa took the helm as president there flashed a glimmer of hope. But halfway through the year, unemployment remains high and economic growth fell more than expected in the first quarter, by 2.2%.

The first set of data released in the second quarter hasn’t painted a rosier picture either.

This month SA got a rude awakening from Fitch. While the ratings agency maintained SA’s sovereign rating at junk status with a stable outlook, the underlying message was clear — Ramaphoria isn’t enough to change the country’s fortunes.

"Current government initiatives are unlikely to improve trend growth significantly, as their implementation and timeline is uncertain and their impact on growth ambiguous," read Fitch’s statement — a stark reminder that SA’s growth and employment challenges require a rejigging of the entire economic structure.

Breaching the 2% growth mark increasingly seems to be a pipedream despite a seemingly bullet-proof plan from treasury.

In February’s 2018 budget, treasury said: "Translating the cyclical upturn and improved investor sentiment into more rapid economic growth requires government to finalise many outstanding policy and administrative reforms, particularly in sectors with high-growth potential."

Telecom reforms, including the release of additional broadband spectrum, could increase growth by 0.6 percentage points. Lowering the barriers to entry by addressing anticompetitive practices could add another 0.6 percentage points, and prioritising tourism and agriculture could cause growth to rise 0.2 percentage points.

But this is easier said than done. The tourism industry has been crippled by stringent visa rules, and agriculture has taken a knock with the drought in the Western Cape.

The Industrial Development Think Tank (IDTT), an initiative of the department of trade & industry to assess policy on the structure of the economy, says government needs to fundamentally restructure the economy.

"Countries develop by changing the structure of the economy to move from sectors of low to high productivity and complexity and within sectors through upgrading to higher value-added activities," it says in a report released in April.

SA may need to look at models such as those in Thailand, Brazil or Malaysia, where economies are similarly diversified but have built up clusters for key industries. In Thailand, the automotive cluster has a strong local base, with skills, technological support and supplier development.

In 2017, the Thailand automotive industry was the largest in Southeast Asia and the 12th-largest in the world, with an annual output of nearly 2m vehicles. Everything is produced and assembled in Thailand — a model that SA has shied away from.

SA’s automotive industry has received support and protection for more than a century, but since 1994 it has been limited to fully assembled vehicles and a narrow range of components, and has not developed the characteristics of a real auto hub like Thailand’s.

Changing from consumption-driven sectors such as finance, insurance, real estate, transport and communication to production-driven sectors such as agriculture, mining and mainly manufacturing may just be the answer to SA’s woes, says the IDTT.

"In SA, the clusters do not exist, including in auto, and need to be substantially ramped up."

For example, manufacturing has close links to other sectors such as services, but the sector’s contribution to GDP declined from 21% to 13% between 1996 and 2013. The Manufacturing Circle, which is the industry voice, has ambitious plans for revitalisation — but this seems little more than another talk shop. Instead, the country remains an exporter of base metals and a growing net importer of machinery and equipment.

The mineral and resource sectors continue to dominate SA’s export basket — up to 60% of the total — and exports have remained commodity intensive, with little added value.

SA’s current account told this dark tale in the first quarter. The current account deficit widened because of a deteriorating trade account — in other words, SA isn’t exporting enough to finance the current account.

"Exports show that there is truly a structural problem that won’t be fixed with a snap of our fingers," says Citibank economist Gina Schoeman.

The blueprint for growth is there, but SA may need to stop riding on Ramaphoria to see any meaningful change.